Markets Today: I Won’t Back Down

om Petty’s 1989 classic is appropriately recast as an “Ode to Alex” (Tsipras) after the Greek Prime Minister says he won’t back down on his referendum decision and that both he and Finance Minister Yanis Varoufakis confirmed they are campaigning for a ‘No’ vote in Sunday’s poll.

Tom Petty’s 1989 classic is appropriately recast as an “Ode to Alex” (Tsipras) after the Greek Prime Minister says he won’t back down on his referendum decision and that both he and Finance Minister Yanis Varoufakis confirmed they are campaigning for a ‘No’ vote in Sunday’s poll. Both seemingly remain utterly convinced such an outcome will result in Greece’s creditors immediately offering the debt relief the two have so far proved incapable of getting the institutions formerly known as the Troika to put into writing.

While markets for the most part continue to treat the latest outpourings of headlines on Greece as White Noise (The Living End, 2008, if you remember), the same cannot be said for the unfolding US economic calendar. The US dollar is stronger against every other G10 currency overnight and US bond yield are higher across the curve, more so at the longer end (bearish steepening) after all three US economic releases beat consensus expectations. Encouragingly, US equities look to have taken the Fed policy connotations of the data in their stride, though this may be in part because the week’s key economic news that will – Greece aside – have most bearing on upcoming Fed deliberations, still lies ahead.

Markets reacted quite strongly to the ADP employment print (237k vs. 218k expected) even through in truth this tells us nothing other than that last month’s official payrolls print was strong. More significant – though as it turned out less market sensitive, was the Manufacturing ISM (53.5 up from 52.8 and 53.2 expected, and with the employment sub-component particularly strong – see Chart of the Day). We also saw construction spending rise by 0.8%, double the expectation, and led by business, not housing, activity.

The positive ISM news was not replicated in the UK where its own manufacturing PMI slumped to 51.4 from 51.9, the weakest since April 2013. The news saw Sterling lose almost a cent, though over the past 24 hours the loss is smaller and GBP actually sits nearer the top than the bottom of the G10 scoreboard.

More surprisingly, the NZD is the ‘least worst’ performing G10 currency despite another weak Global Dairy Trade auction. Prices fell a further 5.9% to be down 40% on the year, in what our BNZ dairy expert describes as “The perfect storm – supply expansion, soft demand, and trade embargoes. It’s a toxic mix”. Thanks Doug.

Other things to note overnight include the ECB’s decision not to raise the haircuts applied to the collateral offered by Greek banks in return for their Emergency Liquidity Assistance (ELA) support, though they also refuse to countenance any increase in the limit of ELA support. Greek citizens are said to be currently emptying ATMs at the rate of €40-50mn a day.

Coming Up

While traders can be forgiven for refusing to blink at the ongoing barrage of Greek related headlines pulverising their screens, the same cannot be said for tonight’s US payrolls report. Upon this, expectations for Fed ‘lift-of’ as early as September will likely turn quite sharply one way or the other. Unless, of course, Greece-related market turmoil erupts next week, to take Fed tightening off limits. Yesterday, St. Louis Fed President James Bullard even suggested July was a live option, but for a supposedly strictly data dependent Fed, he would have to say that wouldn’t he?

Market consensus for the data (bought forward by a day, remember, because of Friday’s Independence Day holiday) is for headline non-farm payroll growth of 225k (estimates range from 145k to 255k). The unemployment rate is expected to tick down to 5.4% to 5.5% (recall the consensus FOMC view of the natural rate of unemployment, or NAIRU, is currently 5.0-5.2%). There will also be keen interest in the earnings data – running at 2.3% Y/Y in May and expected to have held there in June.

Domestically, we get the international trade release, where NAB looks for a smaller deficit after it plunged to a record $3.888bn in April. There should be a noticeable improvement this month from the combination of lower merchandise imports (down 5%) and still high, if not higher, iron ore shipments. We expect a deficit of $3bn but would not be surprised to see an even smaller deficit.

Overnight

On global stock markets, the S&P 500 was +0.70%. Bond markets saw US 10-years +6.88bp to 2.42%. On commodity markets, Brent crude oil -2.31% to $62.12, gold-0.4% to $1,168, iron ore -0.3% to $59.20. AUD is at 0.7649 and the range was 0.7639 to 0.7739. (For more market prices, please see p.2 of the pdf).

About the Author

Ray Attrill is Head of FX Strategy within the Fixed income, Currencies and Commodities division of National Australia Bank.

In this role, he advises the bank’s dealing rooms and institutional and corporate clients on developments in global foreign exchange markets.

Ray has 30 years experience as an economist and market strategist, obtained in roles working in London, Sydney and New York. Prior to joining NAB in 2012, he held a similar role at BNP Paribas, based in New York.

He previously amassed considerable experience in research and strategy, being a joint founding partner for 4CAST limited, a leading independent economic and financial market research company. Prior to that, he worked for many years in senior roles at MMS International, also a leading on-line market research provider.

He holds both Master and Bachelor of Science degrees in economics from the London School of Economics.